Aviva 2013 Annual Report Download - page 193

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
191
Notes to the consolidated financial statements continued
41 – Insurance liabilities continued
(c) General insurance and health liabilities
(i) Provisions for outstanding claims
Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in
assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position
date. The reserves for general insurance and health business are based on information currently available. However, it is inherent
in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss
adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims
and associated LAE, as well as claims incurred but not yet reported and associated LAE.
The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish
catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a
catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into
account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries
from reinsurers after considering their collectability.
The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross
of reinsurance, by major line of business.
As at 31 December 2013 As at 31 December 2012
Outstanding
claim
provisions
£m
IBNR
provisions
£m
Total claim
provisions
£m
Outstanding
claim
provisions
£m
IBNR
provisions
£m
Total claim
provisions
£m
Motor 3,724 1,001 4,725 3,737 1,051 4,788
Property 1,493 180 1,673 1,408 212 1,620
Liability 2,035 1,208 3,243 2,003 1,394 3,397
Creditor 26 18 44 54 13 67
Other 452 161 613 509 173 682
7,730 2,568 10,298 7,711 2,843 10,554
(ii) Discounting
Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of
business for which discounted provisions are held:
Rate Mean term of liabilities
Class 2013 2012 2013 2012
Reinsured London Market business 2.5% 2.0% 12 years 11 years
Latent claims 0.36% to 3.76% 0.33% to 3.35% 6 to 15 years 6 to 15 years
Structured settlements 2.8% 2.6% 35 years 33 years
The gross outstanding claims provision before discounting was £10,914 million (2012: £11,004 million). The period of time which
will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
The discount rate that has been applied to latent claims reserves is based on the relevant swap curve in the relevant currency
having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the
claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between
6 and 15 years depending on the geographical region. Any change in discount rates between the start and the end of the
accounting period is reflected outside operating profit as an economic assumption change.
During 2013, the Group has seen a levelling off in the number of new bodily injury claims settled by periodic payment orders
(PPOs) or structured settlements, which are reserved for on a discounted basis.
(iii) Assumptions
Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled
claims technicians and established case setting procedures. Claims technicians apply their experience and knowledge to the
circumstances of individual claims. They take into account all available information and correspondence regarding the
circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according
to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim.
Claims above certain limits are referred to senior claims handlers for estimate authorisation.
No adjustments are made to the claims technicians’ case estimates included in booked claim provisions, except for rare
occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve
committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of
outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder
and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company’s past claims
development experience can be used to project future claims development and hence ultimate claims costs. As such, these
methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the
observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident
period, although underwriting or notification period is also used where this is considered appropriate.
Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business
are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by
being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.